GlobeTheory #6
Introduction
The catastrophic turmoil that was the Russo-Ukrainian war started in February 2022.
Russia's forceful invasion of Ukraine was undoubtedly the biggest threat to safety and
peace in Europe since the end of the Cold War that followed World War 2, in 1991. The
war had detrimental effects not only on both the countries directly involved, but also
influential global powers such as Germany and most of Europe.
What caused this significant shift?
Germany, the largest economy in Europe, had significant influence over global markets.
It was economically strong and exported high-end products and industrial machinery, so
much so that a major part of the economy ran solely on exports. Being an
energy-intensive industrial powerhouse, it was heavily dependent on low-cost natural
gas from Moscow, for 40% of its fuel to be specific. During the war, Russia cut off its
supply to the European Union claiming a pipeline in the Baltic Sea required
maintenance work, causing an energy crisis followed by the overall decline of Europe’s
economy. Germany became the ‘worst-performing major developed economy’, with high
probabilities of deindustrialization.
Deindustrialization refers to the process of removal and reduction in industrial activity in
a country and the changes that occur because of it, particularly in manufacturing
industries. According to Christopher Kullman, this loss of cheap natural gas from Russia
“painfully damaged the business model of the German economy.” Thus Germany was
forced to develop new gas import infrastructure. As a result, the International Monetary
Fund and European Union are expected to shrink this year.
The Impact
With increased inflation and destabilized energy markets, the German economy started
suffering severely, and reached the brink of recession in late 2022. According to reports,
the Ukrainian war cost the German economy 100 billion euros which was about 2.5% of
its GDP. Every individual from the population of over eighty million lost around
approximately 2000 euros on an average and around 160 billion euros of loss in the
growth initially forecasted. Amongst soaring electricity prices and frequent shortages, it
was soon realized that the money the government had was from delayed projects like
the investment in railways and internet in rural areas. There was also a significant lack
of skilled labor, which became a barrier for a swift transition progress.
Surprisingly enough, the country managed to avoid a highly probable recession even
after the excessive rise in prices in late 2022. The people were warned about an
increase in energy prices, which could potentially lead to social as well as economic
difficulties, along with disagreements. Protests however were relatively less, and
primarily took place only in areas known for opposition against government policies. In
fact, according to studies, most of the public approved of the way the government dealt
with the crisis, although the consistent increase in prices became a grave concern.
Response
Ultimately, the solution proposed was promoting a switch to renewable energy by a
government funded cap on industrial power prices. Germany replaced Russian imports
and found new energy sources such as coal. The government’s primary motive was to
support the production sector, for which a substantial initiative of 200 billion euros was
taken, called “defense shield”. This included subsidies for reducing gas and electricity
costs originally worth 83 billion euros. It also provided subsidies to companies that were
interested in establishing new factories, as an attempt to ensure long-term economic
growth and development of manufacturing facilities. Kullman further said, “We’re seeing
a worldwide competition by national governments for the most attractive future
technologies — attractive meaning the most profitable, the ones that strengthen
growth.”
According to studies, renewable sources accounted for about 46.9% of Germany’s
electricity consumption in 2022. The government made plans to take measures and
strategize reforms to the country’s immigration laws and regulations as an attempt to fill
hundreds and thousands of vacant positions in the field of energy transition. More than
90 billion euros were allocated to support programs such as reduction in petrol prices
and suspension of CO2 prices (specifically for transportation and buildings). Coal units
were temporarily restored to reduce the consumption of gas power plants. The
government also encouraged the citizens to preserve energy and contributed to
conserving gas reserves to avoid shortages in winter, although that seemed unlikely.
With the help of such measures, the country’s gas consumption went down by 18% in
2022.
Germany also built its own infrastructure for importing LNG (liquefied natural gas). If
such projects go as planned, experts predict a good amount of surplus in LNG export
capacity. However, environmentalists believe that the government’s expenditure on LNG
infrastructure could solidify the dependency on fossil fuels. Along with this, the country
is also forming new trade relationships and partnerships with other countries for the
supply of gas, in order to reduce its reliance on Russia. A “safety buffer” would be
helpful regardless, to ensure the regular supply of gas in Germany and the rest of
Europe.
Conclusion
Germany is constantly working towards reshaping its energy economy and reducing its
gas consumption. Stefan Thomann, Technical Director of the European Candle
Manufacturers Association said “Candle demand is very strong right now.” The country
has been successful in making progress, however the citizens continue to remain
concerned about the high energy costs and frequent possibility of supply shortages and
power outages. Looking forward, Germany aims at becoming solely dependent upon
renewable energy by the year 2035. "In the end, where we are going is exactly where
we wanted to go. It's just like we fast-forwarded the transition a little bit." said Thomas
Kuhn.
- By Dhriti Budhwar